Fitch cautioned that pockets of vulnerability remain in banks
KUALA LUMPUR: The bank sector may be showing signs of moderation following its performance in the first quarter of 2019, says Affin Hwang Capital research.
"In our view, weak operating income growth as at 1Q19 (-2.1% yoy; -1.5% qoq) are telling signs of moderating times ahead," it said in a note.
The research house maintained neutral on the sector and is expecting flat core net profit growth in 2019.
Its top "buy" calls for the sector are Alliance Bank with a target price of RM4.80 and Aeon Credit Service
with a target price of RM20.40.
In the first quarter of 2019, sector net profit was RM6.17bil, 4.7% lower year-on-year and 8.4% under the immediate preceding quarter while normalised net profit fell 2.9% and 8.9% y-oy and q-o-q respectively.
"The sector’s core net profit (RM6.16bn) was within our expectations, accounting for 23% of our 2019E banking universe’s net earnings projection of RM25.7bn," said the research house.
It added that earnings revisions for 2019E-21E have been minimal.
However, Affin Hwang foresees higher downside risks on earnings for Maybank and AMMB on concerns over higher credit costs.
The key sector earnings driver for 1Q19 was the banks' strong fund-based income, which rose 1.7% y-o-y and fell 1.9% q-o-q, and accounting for 75% of operating income.
Net interest margin saw compression of 7bps on a y-o-y basis while it was mixed q-o-q.
"Meanwhile, non-interest income (excluding one-off disposal gains) continued to disappoint yoy and qoq due to weak investment income.
"As the sector’s operating expenses have been flat yoy and qoq, we have not seen much changes in 1Q19’s average cost-to-income ratio (CIR), i.e. at 49%," said Affin Hwang.
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